News & Analysis

Jay Powell and the stable USD: Federal Reserve goes the conservative route for now

Andrew Saks, Tuesday, 23 November 2021

Stagnation in the currency markets has been a bugbear for many years, so much that many derivatives brokerages and electronic markets have built their entire business models on non-volatile currency markets.

So much so that currency trading has been usurped by stock CFD trading and commodity trading over recent times, largely due to the more significant daily movements in listed company stock and the recent price fluctuations in certain commodities such as oil and gas that the energy supply wranglings have had this year.

However, when a major central bank votes on its leadership, small ripples of volatility in an otherwise millpond-like major currency price market tend to occur.

Jerome H Powell, known as Jay Powell, has been elected for a second term as chair of the US Federal Reserve, which has had a light impact on the US futures market, and the US dollar jumped across the board as the US Dollar index rose by 0.2%.

0.2% does not seem much of a move, however USDGBP is now standing at 1.34, which demonstrates a considerable strengthening by the Dollar, putting it at the same value a that of ten days ago on November 13, 2021, when it was at a one month high.

This strengthening of the dollar is perhaps of interest to day traders, and is, whilst quite small, still a welcome movement for the currency markets which have languished in a shadow of surprising stability throughout this year of market turmoil, SPAC listings, oil price rises, climate clamour, unusual government policy and energy shortages which has brought rapid price movements in other asset classes.

The real aspect of interest is perhaps not the small move the US dollar made, but the reason that it only made a small move. Largely, many analysts are considering that the re-election of Mr Powell has bolstered confidence, as his track record is known and therefore the markets have shown a slight upward direction in dollar values due to the potential stability Mr Powell can bring, without huge value appreciation as Mr Powell's record is one of steady rather than radical policy.

Back in August, Mr Powell took a very conservative view on tackling inflation, noting that it had risen to 4.2% which is, to say the least, high.

In his address at the time, Mr Powell gave a positive outlook, having stated that businesses and consumers widely reported upward pressure on prices and wages, however noting that due to it being well above the 2% estimated average, inflation at these levels was a cause for concern, but that such concern was tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.

He looked at the recovery by US businesses from the effect of lockdowns, and that this had been largely the product of a relatively narrow group of goods and services that have been directly affected by the lockdowns and the subsequent reopening of the economy. Durable goods alone contributed about 1 percentage point to the 12‑month measures of headline and core inflation as of August this year.

The problem is, of course, that here we are in November and inflation is still high.

Mr Powell has done well in resisting any interest rate rises, however if eventually the inflation cannot be sustained and interest rates rise like they did in 1991 in the United Kingdom, the US dollar would likely be very adversely affected and Mr Powell's calming effect on investor confidence may well be reviewed very quickly.

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